Pure premium is a fundamental concept in the field of insurance, representing that component of the overall premium which is specifically earmarked to cover expected losses. This portion of the premium is calculated without including the insurer’s operational expenses, premium taxes, contingency reserves, or any profit margin.
Components of Pure Premium:
- Expected Losses: This refers to the estimated amount that the insurer anticipates paying for claims during the policy period.
Exclusions from Pure Premium:
- Operational expenses: Costs associated with the day-to-day operation of the insurance company.
- Premium taxes: Taxes levied by the government on the premiums collected.
- Contingency reserves: Funds set aside to cover unforeseen losses.
- Profit margin: The financial gain projected by the insurance company from the policy.
Understanding the concept of pure premium is critical for stakeholders in the insurance industry, including policyholders, as it directly influences the pricing of insurance products.
Reference:
For more detailed information regarding how premiums are calculated in the insurance industry, you can refer to The National Association of Insurance Commissioners or the relevant sections in governmental insurance regulations of your region.
